Fears for future of KPMG

ACCOUNTANCY giant KPMG could be heading for collapse - following in the footsteps of its fallen former rival Andersen - after it emerged today that the US Department of Justice is considering laying criminal charges against it for obstruction of justice over the sale of illegal tax shelters.

KPMG today took the unprecedented step of admitting that it and its partners had acted unlawfully from 1996 to 2002 in developing, promoting and implementing tax shelters.

It is understood that about 30 partners were involved in the selling of complex tax shelters to wealthy individuals in schemes that amounted to deliberate tax evasion. Early indications suggest the firm may have earned up to $180m (£99m) from the schemes.

As well as possibly being indicted by the Justice Department on those charges, KPMG could be charged with obstruction of justice after it emerged that the firm had allegedly lied to the US Internal Revenue Service (IRS) over the affair.

An obstruction of justice indictment over the Enron scandal led to a collapse in confidence in Andersen, and ultimately its disintegration.

The threat of Federal action against KPMG will pile the pressure on Mike Rake, the British accountant who is chairman of KPMG International. Rake, who earns £2.45m year and also heads the UK operation, is in his last year before retirement.

The spotlight could also fall on Colin, now Lord, Sharman, chairman of KPMG International when the illegal tax shelters were first being peddled. A Liberal Democrat peer, Sharman holds directorships with a number of firms including Norwich Union insurer Aviva and Group 4 Securicor. He chaired KPMG International until his retirement from the firm in 1999.

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The company said in a statement: 'KPMG takes full responsibility for the unlawful conduct by former KPMG partners during the 1996 to 2002 time period and we deeply regret that it occurred.'

It said that it had since taken a number of actions, from discontinuing the tax-shelter advice service to introducing reforms of ethical standards and 'undertaking significant change in business practices'.

It added: 'We have put in place a process to ensure that those responsible for wrongdoing have been separated from the firm.'

Partners leave over probe

IN A forerunner to today's threat of an obstruction-of-justice indictment, KPMG was instructed 12 months ago by a Federal judge to respond to IRS summonses over the peddling of illegal tax shelters.

Referring to IRS claims of 'false assertions' by KPMG, Judge Thomas Hogan said the firm had deliberately attempted to hide its tax-shelter activities and that KPMG documentation was 'inaccurate, incomplete and even misleading'.

Around 30 partners being investigated over the affair have left the firm. In April, three senior partners in its tax division were dismissed. Last year, the US firm's chief financial officer Richard Rosenthal and deputy chairman Jeffrey Stein left.